China policy meeting can tip economic recovery scales, or disappoint again
Summary
Markets hope for a blockbuster fiscal package aimed at the economy’s weak spots. But optimists have been burned before and there’s a higher degree of skepticism this time around.
China’s top legislative body gathers for a five-day meeting next week. Markets hope for a blockbuster fiscal package aimed at the economy’s weak spots. But optimists have been burned before and there’s a higher degree of skepticism this time around.
The Standing Committee of the National People’s Congress meets Monday and state media will likely report its decisions Friday.
Here’s what to watch:
SIZING UP: China-watchers have for months wondered how big the fiscal package will be. Expectations vary but many see stimulus equivalent to roughly $1.4 trillion. Government spending has been much slower than expected this year and economists will want to see that ramped up.
Nomura analysts led by Ting Lu say the scale of the fiscal package could eventually be 2% to 3% of gross domestic product a year, over the next several years.
DEBT SWAPS: Financial relief for local governments is almost certain to feature as the property slump dries a major revenue stream for administrations overloaded with debt.
Officials say they are readying the biggest local-government debt swap in recent years, but it’s unclear if this will fix their fiscal woes.
Local governments could get 6 trillion yuan, equivalent to $842.90 billion, to refinance off-balance-sheet debt, says Darren Tay, head of APAC country risk at BMI, a Fitch Solutions company. Any less would probably disappoint markets, as even that’s barely 10% of the total outstanding, he says.
Debt swaps may ease burdens but won’t directly create demand in the real economy, says Larry Hu, head of China economics at Macquarie. Beijing has deployed this tactic before. That didn’t drive recovery then and seems unlikely to do so now, he adds.
BUDGET BONANZA: As year-end approaches, economists see little room for more government bond issuance near term. Trillions of yuan worth of extra bonds will likely be approved for the next few years instead, focusing on recapitalizing banks and aiding local governments. A supplementary budget could be tabled or the fiscal deficit raised.
Goldman Sachs economists expect 1 trillion yuan-2 trillion yuan in additional ultra-long central government special bonds for debt swaps.
Nomura sees 1 trillion yuan of funding to recapitalize banks, which will be used mainly to write off non-performing loans. Given the huge fiscal revenue gap and the finance minister’s pledge to meet fiscal targets, it sees scope for an extra budget, most of which will be transferred to local governments.
US ELECTION: The NPC meeting is usually held at the end of October, but comes in November this year, after a U.S. election that could affect policy outcomes.
Beijing will likely craft different stimulus packages depending on if the Federal Reserve hints at more interest-rate cuts and on the results of the election, two events in focus next week, Daiwa analyst Patrick Pan says.
A Trump victory could mean Beijing braces for more trade battles as Trump has talked about raising import tariffs. If that risk materializes, the NPC may approve more fiscal resources, Goldman Sachs economists says.
Nomura thinks fiscal stimulus will be around 10% to 20% larger if Trump wins.
If Harris wins, China’s fiscal spending could be close to 3% of GDP. Under Trump, that might be nearer to 2%.
TAKING STOCK: Chinese stock markets have made wild swings in recent months after stimulus announcements, making investors increasingly cautious.
“Investors are still in wait-and-see mode," as there’s no clear trading direction ahead of the NPC, Daiwa’s Pan says.
He thinks property, consumer and bank stocks will likely benefit the most from the NPC. If the results are better than expected, investors could boost their holdings of Chinese stocks, he says.
SOCIAL SECURITY: Strengthening China’s social-security net is viewed as crucial for restoring confidence among households. But officials’ concern about setting a welfare precedent suggest measures in this area will be limited.
The ministry of finance hasn’t dropped hints on large cash handouts to boost consumption and anyone expecting a focus on that is likely to be disappointed.
Barclays economists led by Yingke Zhou think the government may opt for incremental increases in subsidies for low-income groups or students, but not enough to reinvigorate consumption. Nomura pegs any additional social security spending at a maximum of 1.0 trillion yuan.
Write to Jiahui Huang at Jiahui.Huang@wsj.com and Fabiana Negrin Ochoa at fabiana.negrinochoa@wsj.com
